Fear – “I Don’t Care About You” from the movie “The Decline of Western Civilization.”
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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).
Back in 2006 when I first started blogging it was ostensibly to keep an online journal of my trades; but the real reason was to check myself.
I figured that the way to make sure that I didn’t stray from my trading rules, especially since I was trading for a living at that time, was to put everything out in public for all to see.
These days I don’t post much publicly, if at all, about trades I make for a number of reasons.
First off, there are many other traders out there who do analysis better than me. Secondly, since I have a full-time job, two small kids, and an awesome blog, I just don’t have the time and energy to post trades I make. But but the biggest reason that I don’t is because it screws with my head.
I’ve learned that when many eyes are on me, even if they are friendly eyes, it changes my mindset when trading. I don’t know why, and though I could spend many years and thousands of dollars unravelling the psyche behind it, I would rather just accept it, adapt to it, and relax with a beer instead.
What I do like to post about are ideas and concepts relating to trading. And the fact of the matter is that even though it makes me very happy when get feedback from readers about posts on my blog that help them improve their trading skills, I really write every post for an audience of one……me.
In the same way that taking notes helps to imprint an idea from a lecture better than just listening to it, when I write about the markets, that act in itself helps me to reinforce my trading discipline.
There are a lot of traders with very “clean” blogs, meaning if you read their posts you would get the sense that they have attained trading perfection, never make stupid mistakes, and are ALWAYS profitable. Okay, whatever. My blog is about being honest, so allow me to “bleed” publicly a bit here as a reminder to myself what not to do in the future.
Wednesday after the $NQ_F got done with what I thought was an overreaction to the numbers from $CSCO, I took a position, with the intention of holding overnight. Price grinded up and successfully held support twice, and made a nice run towards the open.
CLICK TO ENLARGE
And that is when the trouble began. Here is what I did wrong.
1. I didn’t acknowledge the fact that a double top had occurred.
2. I didn’t respect the large inverted red hammer that formed the second part of that double top.
3. I didn’t add in the importance that the two points above occurred at an obvious (and already drawn) resistance level from the previous day’s high.
4. I didn’t factor in that the first two points happened after an extended run.
5. I didn’t give weight to the MACD already having crossed over and trending down.
And of course that inverted candle hammer was a top.
CLICK TO ENLARGE
Ignoring one obvious sign is bad enough, but five? What the hell was I thinking?
Earlier this week I wrote a post about using pain to become a better trader, and one of the suggestions was to go back through your trades with the mindset you had contemporaneously to try and figure out what you did wrong. Let me follow my own advice here and take a shot at it.
I was greedy. I had been thinking we were due for a big bounce, and the fact that the futures were green and $NQ_F had shrugged off the $CSCO news made me think it was here. That of course means I was trading off of a script, BUT not marrying it with technical and price action as I have spoken about many times before.
I was also doing a number of things near the open and not putting my full attention on the management of the trade. I rationalized that by thinking I was giving it “more room to run.” That extra room cost me about 25% of my profits.
On the plus side, it was a winning trade, I sold before things got too out of hand, and I can identify what my mistakes were.
Trading is a process, and a never-ending process at that. Being honest about your mistakes and understanding why you made them will help to ensure that you always get better at that process.
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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).
In 2001 I was “the bomb.” I mean I was the big swinging dick, the axe in the markets, the “schnitizel.” That’s what the cool kids say, right?
My god-daughter was born just two-years earlier and I was in love with her. I decided that I would do the god-fatherly thing and guarantee that her college education was totally paid for.
It would be easy because I knew them markets baby, and I could trade them like a pro. There was this hot stock called $CSCO that was having a temporary pullback. Buying it at $30.00 was friggin’ steal. Besides, I had sixteen years until my god-daughter would be going to college and by that time $CSCO would be probably at $5,734 per share.
It didn’t quite work out for me like I had planned, which I was reminded of when John Chambers, or as I like to call him “The Spectre of Death,” announced earnings yesterday that will put $CSCO back to 1998 prices.
I have a lot of ground to make up in the next six years, but I think I can do it. And now I have to focus on my own kids college education which is 12 and 15 years away respectively. But I think I have that one clocked, as I just put some money in $NFLX and $GMCR. By the time my kids are ready for college, well those stocks should be……
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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).
[Note: This is the analog post to my recent "How To Master Trading Discomfort To Improve Your Results." Traders will relate differently to each post, but the goal is to use the one that fits your personality best in order to improve your trading.]
I have to say that I really enjoy reading the comments on my blog. Instead of the usual trolls that tend to inhabit most public blogs, I seem to get a pretty cool mix of people who have something nice or useful to say. And sometimes a comment provides the inspiration for a new blog topic, like the one I got from “Alex” the other day on my “5 Rules For Trading A Reversal Hammer” post.
This is a good setup, I’ve seen it happen a lot. Usually I am on the side selling at the point when all the sellers are exhausted though.
I feel your pain Alex, cause I have been there a number of times myself.
I always remember the trades I lost big on or the poker hands where I got a bad beat because the pain of loss is more acute than the joy of winning. Pain makes more of an impact on me, which I think is just human nature.
Think about it. If you walk down the street tomorrow and ninety-nine people smile and say “hello” as they pass you, but one A-hole sneers and says, “what are you looking at jerk?” who will you remember at the end of the day? The ones who made you feel warm and fuzzy, or the one who made you say “ouch”?
Many of life’s lesson, both big and small, never really seemed to “stick” when I was younger until there was some pain associated with them. For example, pushing in a half opened tab on a beer can with your thumb is perhaps not the wisest move; yet I did it all the time in my younger days. That was until once while on vacation in Australia I tried to do it with a frosty cold can of delicious Victoria Bitter lager.
Pro Tip: Blood and beer don’t taste good together.
I often look at the small crescent shaped scar this incident left me with and remember what an idiot I could be (…okay, still can be) at times.
It was hard to make this photo not look phallic...!
I know a lot of great traders who have a “zen-like” way of approaching the markets, and are able to trade pain free, but for the rest of us, pain can be used to make you a better trader.
The hammer reversal setup that Alex was commenting on was one I had read about and had been explained to me too many times to remember, but that is not what finally got me to understand it and how to trade it. It was being on the opposite side of that trade and experiencing the pain of getting in too early that finally rang my bell.
It seemed that just when I got to the point of max pain and finally closed my position out for a loss was when price reversed, which was just like dumping a ton of kosher salt into an already gaping wound. But that pain focused me, and each time it happened I figured out a little bit more about what I was doing wrong.
Even to this day, in a fast moving market where I am looking to play a bounce, I will sometimes take a very small position, as small as 25 shares, in order cause me a little pain. In this scenario, stop loss and risk/return concepts are irrelevant because the $ loss is so insignificant.
But it’s not the $ loss that causes me pain, it’s being wrong. A small position going against me, causing some pain, will once again focus me and makes me better able to find the correct setup to add to the tester position and make it a full position.
Pain is very powerful if you know how to use it.
If you are trading bad, racking up losses, causing yourself pain, don’t thrash back into the markets trying to make it go away, or throw your keyboard, or yell at your wife. Instead, don’t do anything; just hold that pain. Imprint it into your head so you remember what it feels like. And think of how nice it would be to avoid that pain in the future.
Now use that as motivation. Go through your trades tick by tick. Remember what your mindset was contemporaneously and identify flaws in your thinking and execution. Take each of your losing trade charts, drive your ass down to Kinko’s, and get them blown up and printed out. Mark these charts up and hang them right over your trading screen as a reminder of the pain they caused you and what you can do to avoid that pain going forward.
And of course the ultimate goal is just that; to get to the point where you don’t need the pain in order to trade successfully. But until that time, The key is not to fight pain, but to harness it and use it to your advantage.
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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).
1792 -There are five securities traded in New York City. Three are government bonds and two are bank stocks.
Now – There are approximately 8,000 listed issues on NYSE Euronext.
___
1823 – Fredriksen Lunde, my great, great-grandfather emigrates to the U.S. from Sweden. He passes on buying a seat at the NYSE as he feels capitalism is “a fad.”
Now – Every year, on the anniversary of his passing I visit his grave and throw lingonberries at the headstone.
___
1886 – The Exchange experiences its first million-share day on December 15th.
Now – NYSE Volume yesterday was 3,564,732,250.
___
1942 – A membership sells for $17,000, the lowest price in the twentieth century.
Now – Before going public the highest price paid for a NYSE seat was $4 million on December 1st, 2005
___
1952 – The NYSE, in its first shareholder census, finds that 6,490,000 Americans own common stock.
Now – Stock ownership peaked when 67% of Americans owned stock in 2001, and as of 2012 sits around 54%.
___
1974 – Trading hours are extended from 10:00am until 4:00pm.
Now – NYSE Arca pre-market 4:00 am to 9:30am EST. Regular NYSE trading until 4:00pm. Arca Extended Hours 4:00pm to 8:00pm EST.
___
1993 – Daimler-Benz AG becomes the first German listed company.
Now – 421 non-U.S. companies valued at $ 11.4 trillion trade on the NYSE.
___
1996 – NYSE listed company Oakley ($OO) misses earnings and massively gaps down, cutting my trading account in half. The stock never recovers.
Now – I only wear Ray Bans.
___
2001 – Decimal pricing of all NYSE stocks is fully implemented, ending the practice of trading in fractions used for two centuries.
Now – Pricing regularly goes six places past the decimal (i.e. $44.419900).
___
Now – I decline to buy $FB at its IPO and ridicule the stock as overvalued and “a fad.”
2052 – I am sent to the “home” after punching my adult grandson in the mouth when he asks “hey grandpa, why didn’t you buy $FB in the years before they bought $MSFT, $IBM, $AAPL, $BIDU, and $GE, becoming the biggest company in the universe?”
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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).
There is a school of thought that a trader should focus on one or two “bread and butter” type set-ups and get as good as they can at them. It’s something that I used to read about on Trader X and the Wall Street Warrior’s blogs, and I have come to totally agree with.
I have found one of the more reliable intra-day setups is to buy off of a reversal hammer, however there are a few rules I follow in order to raise the percentages is my favor.
1. There has to be an “aggressive” downtrend preceding the hammer; in fact the more violent and bloody the better.
2. You want to see a large volume and price spike on the candle before the hammer. This is key because it usually means that the last group of longs are “throwing in the towel” en masse.
3. The hammer has to reverse in/at a previous support level.
4. The hammer has to be green, and the closer to a hammer opposed to a doji the better.
5. The overall market direction should be up, flat, or slightly down. Trying to catch a reversal hammer when the broad market is down big on the day is a losing game.
This chart on $AAPL illustrates an almost a perfect reversal hammer set up. The only negative is that the actual body of the hammer is not as big as I would like it to be.
Some traders think that you should wait for an inside consolidation bar after the hammer before you buy the break, but I don’t agree. The dynamics of a hammer reversal, with the spike down on volume and price, as well as the long tail of the hammer itself, should mean that all sellers are exhausted, at least temporarily, and price should move back up fairly strongly.
A consolidation bar tells me that buyers are not easily overpowering sellers, and that the hammer may just be a temporary pause before a new round of sellers come in.
Once you have bought the break of the hammer’s high, if you are a conservative trader, you should take a partial when price touches the 9 EMA. If you are an aggressive trader, you could take a position based upon 50-75% of the hammer’s length instead of the total length, and also take a partial at the 9 EMA.
The most conservative way to play a hammer reversal is to not buy the break of the hammer, wait for price to bounce, settle back down to the support area, and form a second hammer. You could then buy the break of that hammer.
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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).
Let’s be honest, you could pretty much throw a dart any day of the week at the StockTwits Blog Network, and end up hitting a post that is better than 99% of the other stuff out there that passes as financial blogging. So to say these are “The Best of….” is a little disingenuous; let’s just say these are some of the posts from the last week that caught my attention and I think will interest you.
Most normal people who don’t want their car to die between LA and Vegas or to catch fire drive gas-powered cars. The Armo Trader thinks that it will cost less to do that in the future. “I See Cheaper Gas In The Future.”
“Trade What You See” really means, “If You Pay Attention, You Won’t Get Your Head Handed To You,” as StockSage1 shows us.
The “OJ treatment,” “punk analysts,” and “dropping street knowledge” is what you will find in “You Are Now About to Witness the Strength of Street Knowledge” by The Reformed Broker.
In theory, some of us will actually purchase a home again, and The Basis Point fills us in on the ways to make a non-traditional down payment in “Down Payment Rules When Using 401, IRA, Gift For Home Purchase.”
Kennedy was killed by a lone gunman. Yeah Right? We actually landed on the moon. What are you smoking? The MF Global mess might be a conspiracy. Hmmmm…..well maybe? “MF Global Conspiracy Theory That Might Not Be Far Off,” by Points and Figures.
In poker you have to think on different levels. You have to know what you have. You have to know what your opponent has. And you have to know what your opponent thinks you have. Trading is similar and Kid Dynamite’s World illustrates that in “On Einhorn and Herbalife.”
When I used to try to pick up girls in a bar, even though I was tall, smart, and devastatingly handsome, I was shy and never really gave myself a chance. Don’t be like me. “Give Yourself A Chance” by Joe Fahmy.
If you haven’t already purchased “Winning Strategies From The Frontlines Of The Investment Blogosphere,” you are missing out. Ivanhoff Capital gives you some idea why in “10 Insights from Abnormal Returns – The Book.”
$RIMM is the new anit-$AAPL, with all sorts of theories as to what their ultimate fate will be. Investing With Options joins the fray with “Will RIMM Shake Up Shorts With Their Patent Portfolio?”
“Is it a Tech Bubble?…NO…Just too many Wantrepreneurs,” by Howard Lindzon is worth a read just for the “Night Shift” reference, though I prefer this one:
Bill Blazejowski: [picking up photo on Chuck's desk] Hey Chuck, who’s this? Wife?
Chuck Lumley: Ah…fiance’.
Bill Blazejowski: Hmmm………nice frame.
What should you pay more attention to when it comes to the jobs report, instant analysis, or historically dominant patterns? “What the Jobs Report Means for Trading,” by Dynamic Hedge. I wonder if he brought me back a six-pack of Victoria Bitter?
There is nobody out there that shows the relationship between different instruments better than Dragonfly Capital. “Yellow Gold vs Black Gold.”
After yesterday’s bloodbath, I’m sure many people want to know where the bull market is. Crossing Wall Street tells us. “The Hidden Bull Market for Consumer Discretionary Stocks.”
For fat people. “How I Lost 100 Pounds” by The Altucher Confidential.
As it becomes more prevalent, how will crowdfunding evolve? “The real-time crowdsourcing experiment,” by Abnormal Returns.
I love the trading posts that 1nvestor does because they are powerful and follow the K.I.S.S. rule. “The stages of a trade, and the one that REALLY matters.”
What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).
Why not subscribe to bclund.com for free Via E-mail or Via RSS and follow me on StockTwits and Twitter?
From 1979 on BBC’s Old Grey Whistle Test. Brilliant!
Subscribe to bclund.com for free Via E-mail or Via RSS and follow me on StockTwits and Twitter?
What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).
Despite what you may think, the original first wave of punk rock was not monolithic as a genre, nor did it have a singular identity.
UK punk was about social injustice and being on the dole. New York punk (except for the Ramones) was linked to the art scene. And LA punk was mostly a style based movement.
But in Orange County, California, punk rock was about anger, violence, and danger. The epicenter of that danger was a dingy roadhouse bar in Costa Mesa called “The Cuckoo’s Nest.”
The clip above is from a fascinating film called “We Were Feared” which chronicles the story of the Cuckoo’s Nest and its iconic owner Jerry Roach.
It seems odd that in an upper middle class area like Orange County punk would take such a hard and vicious turn, but you could hear it in the music and feel it in the presence of those that played it.
One of the factors that made the Cuckoo’s Nest such a volatile place though had to do more with what happened outside than inside.
Directly adjacent to the Cuckoo’s Nest was a country western bar called Zubie’s, that catered to the ranks of wannabe cowboys that mushroomed out of the “Urban Cowboy” craze. It created an interesting equation…
Alcohol + Punks + Alcohol + Rednecks = A shit load of fighting.
For those who were there, it almost seemed like going to the “Nest” was as much about fighting as seeing a great band. Usually the punks got the best of the cowboys as Jack Grisham, lead singer of the band TSOL relates;
“They’d come out of [Zubie's] drunk, and there’d be fights every night. There’s a videotape of me beating up these two cowboy guys, and I was wearing a dress at the time. I was trying to [tick] my dad off for a while, and [wearing a dress] was working good.”
But there were actually some great bands that played the Cuckoo’s nest like SoCal favs Black Flag, Circle Jerks, Social Distortion, D.I. The Adolescents, The Crowd, The Vandals, and Fear.
Even bands from the UK like XTC, The Damned, and 999 played there as well as East Coast bands like The Ramones and The New York Dolls.
It was like CBGB’s east, but with the possibility of getting your face smashed in.
Cuckoo's Nest owner Jerry Roach with The Ramones
Alas, things that burn so strong also burn out fast, and after numerous legal challenges by the city and county, Roach eventually gave up the Cuckoo’s Nest, with a final indignity being that the owners of Zubie’s bought it and opened up a pizza parlor in its place.
Wikipedia entry for The Cuckoo’s Nest
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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).
Having been on both sides of the aisle; the trader side and the brokerage side, I think I have a different perspective on the this issue of stop placement than most. During the course of the day I see a lot of what goes on in the soft underbelly of trade executions and I also talk to a lot of traders who initiate those executions.
One of the complaints that I often hear from retail traders is, “I can’t believe it, they hit my stop and then ran the stock right back up.” This is definitely one of the most frustrating things that can happen to a trader, and when I hear it my empathetic response is…
“No duh? Of course they hit your stop, they knew right where it was.”
But they are not supposed to be able to see your stops right? And if they can’t see them, then how can they go after them?
More on that in a minute.
First let me take a moment to clarify who “they” are. To tell the truth, I don’t know who “they” are, but I watch “their” actions every day. They could be market makers, specialists, bots, HFT’s, Algo auto-traders, a combination of all of them, or just the market mojo driven as a whole by the spirit of the late Paul Lynde.
It doesn’t really matter what the mechanics of it are, it’s just the results of those mechanics that matter.
The bottom line is that many entities in the market benefit by volume, and they do anything they can to create that volume, like triggering your stops with only a quote instead of an actual trade which I have written about before.
This type of market action has changed the rules of trading, and let’s face it, the rules of trading have always been pretty dicey to start with.
If you had a 50/50 chance of a certain trading rule holding up in past markets, it’s now more like 25/75. Of course I am just pulling those numbers out of my ass, but you get the point; the market has changed, and you have to change the way you trade it, especially when it comes to placing stops.
Let’s start with an illustration that I painstakingly created in a very high-end program called Microsoft Paint.
In days of yore, the way this trade would have been played out is that you would have waited until a double bottom was put in at point B, entered on the bounce, and put a stop in below the red line. If your trade did indeed fail and stop you out, it would normally continue on down to new lows. But that’s not how it works anymore.
More often than not, before the trend completely reverses and moves back up, you get one last shiv, as price quickly drops below the double bottom to point C, and then just as quickly reverses back up above the support line and continues to run higher. This is when I hear the retail traders start to holler about their stops being hit, run, liquidated, or “spanked” depending on what they are into.
So can they see your stops and go after them? No they can’t, not in the sense you think they can. In past days if a large human participant wanted to try to run the stops, well they didn’t have to be a genius to know where everybody and their brother put their stops. Just by looking at a chart and understanding human nature they could figure that out.
Today in the world of robo-trading, “they” know the same thing, it’s just that they are programmed to know instead of having a live human being drive the strategy.
So “No!” Mr. and Mrs. retail trader, they are not running your 100, 500, or even 1000 shares of XYZ, they are running the 10′s of thousands of shares of XYZ that they know are sitting just below the double bottom of the day. And if you are buying a breakout, it’s basically the same concept.
Price runs up, pulls back, bases, proceeds to break to new highs, but then pulls back to point C and the wehewqlkg etoetdg=reegr.g.gge;wp %$$%()SSQds…….
Sorry my cortex just snapped from repeating myself for the millionth time. I don’t need to belabor this point, you get what I am talking about here.
So the big question; how can I put in more effective stops? There are basically three ways to do it, each of which I will make up a random and important sounding name for.
The Johnny Sokko And Giant Robot Method:
This involves adjusting your position size based on a “stop plus” methodology. Normally by knowing the spread between your entry and your stop below support, you divide that into your max $ loss per trade and that is your position size.
But based on the new market dynamic you need to add a “plus” factor to your stop, in essence making your position size smaller, but giving you a better chance to not get shaken out on a run of the obvious stop level.
What you use for a plus factor depends on what type of asset class you are trading, the specific traits of the instrument in that class, and the overall market tenor. A suggestion would be to start experimenting with a fixed percentage of the ATR and adjust depending on the results you see.
A Rainbow In Curved Air Technique:
Here you would actually anticipate the run of the stop area at point C on the above charts and put a limit buy order there. Basically you are not buying support anymore, you are buying “support minus.” What your minus amount is once again would need to be experimented with, but as a variation you could break your position into two or three limit buys in a range below support.
The advantage to this method is that if you do get filled below support and price does not rally back over that level, you can be reasonably sure that support has truly failed and price will continue lower making your stop out a no brainer.
The Larry Tate Experience:
The last method is a hybrid of the previous two for those that worry they will “miss a move” if they try to buy below support. I mean what if price never gets there and they don’t get filled right?
Instead you take a half position on the bounce off of (or past) point B. If price continues to run so be it, but if it makes a stab past support to point C, you have some dry powder to grab the second half of the position.
This ultimately gives you a better average price, and once again allows you more room for price to run back up before stopping you out, though not as much room as the “Rainbow” method.
Conclusion:
It is a common saying that trading is “chess not checkers,” but these days it is more like that 3D chess game that they had on Star Trek, with a helping of Dungeons and Dragons, and some poker thrown in.
You can no longer think in a “logical” way and have to be able to modify the traditional trading rules when it comes to stop placement and trade management. And even more critical is the ability to think on different levels, many moves ahead, and be willing to evolve your methodology for the ever-changing market.
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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).
